State Auto Financial Corp. said it no longer wants to be in the nonstandard automobile insurance business and is selling a subsidiary that sells that insurance--State Auto National--to Hallmark Financial Services Inc.

"Enabling State Auto National to effectively compete in the nonstandard market would require a significant investment that couldn't be leveraged elsewhere within the State Auto Group," Bob Restrepo, chairman and chief executive officer, said in a statement.

He said State Auto National was "no longer a good strategic fit" for the group.

Hallmark Financial subsidiary Hallmark Insurance Company of Fort Worth, Texas, will acquire State Auto National for $14 million cash at closing and $2 million in an additional future payment, or "earn-out."

State Auto National writes about $37 million in nonstandard auto policies each year via independent agents in 21 states.

Closing is expected later this year, subject to certain conditions and regulatory approval.

State Auto said it will retain liability for the book of business until the policies are renewed with Hallmark following a six-month transition period.

Hallmark said it will fund the purchase out of working capital.

Brooks Davis, president of Hallmark's personal lines unit, said the nonstandard line may not fit State Auto corp., but it is "very complementary to Hallmark's personal lines portfolio from a product, distribution and geographic standpoint."

The acquisition will allow Hallmark to realize personal lines growth in new markets or markets that are in the early stages of development, Mr. Davis said.

Based on direct written premiums, State Auto National writes most of its business in Tennessee, Kentucky, West Virginia, Ohio and Maryland, according to Highline Data, a part of Summit Business Media, which owns National Underwriter.

The Ohio-domiciled insurer posted a combined ratio of more than 100 in 2008 and 2009, with net income of about $1.2 million and $1.5 million, respectively, after recording net income of about $5.8 million in 2007, according to Highline Data.